1970 and 1971 respectively that ginnie mae and

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1970 and 1971, respectively, that Ginnie Mae and Freddie Mac had first issued MBS; Fannie Mae had issued its first MBS in 1981. Together, these GSEs had given birth to the U.S. mortgage securitization market. The dizzying heights that this securitization market eventually scaled played a central role in the financial crisis of 2007-09. However, in 1982 this market was a fledgling one. It was widely noted that the secondary market for mortgages was so illiquid that financial firms were stuck holding mortgage loans, creating huge dislocations as conditions worsened. As such, the idea behind MBS was financial innovation at its best: The banking sector didn’t have enough capital (or risk appetite) to hold all of the mortgage loans, yet these individual loans were too illiquid to be sold easily to investors. By pooling the loans into MBS, and selling the MBS to investors in the capital market at large – pension funds, insurance companies, the emerging mutual fund sector, et cetera -- the mortgage market would become much more liquid. This would simultaneously allow this market to expand and improve mortgage loan pricing, resulting in lower mortgage interest rates for homeowners. It was not until the early 1980s that the Wall Street firm, Salomon Brothers, created a mortgage trading operation. With this operation, the firm created and tapped into a new class of interested investors that focused on the MBS market. The operation run by Lewis Ranieri, and
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18 made famous (some would argue infamous) in Michael Lewis’ book Liar’s Poker , just needed a kick start, and the deregulation of mortgage finance took off. Ironically, one of the conclusions of the Commission was that this deregulation would put an end to the government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac: “Eventually, the Commission believes, both FNMA [Fannie Mae] and FHLMC [Freddie Mac] should become entirely private corporations, without special access to the deep pockets of the Treasury.” The Commission was just a tad off in its prediction. At the end of 1981, when the Commission was starting its work, Fannie and Freddie represented just 7.1% of the residential mortgage market, and held $64.8 billion worth of mortgages in their portfolios and guaranteed an additional $20.6 billion. A decade later, their market share had grown to an extraordinary 28.4%, with corresponding portfolio holdings of $153.4 billion and guarantees of $714.5 billion. And by 2002, they held $1.21 trillion and guaranteed $1.52 trillion, equivalent to a 44.7% share of the residential mortgage market. This growth of Fannie and Freddie is depicted in Figure 1-1 below. The left-hand side provides the total dollar value of Fannie and Freddie’s commitments to the mortgage market through their portfolios and their net MBS issuances, while the right- hand side represents their share of the mortgage market.
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